If you’re like most people, the prospect of signing a business contract makes you break out in a cold sweat. But when you start a franchise, you’ll have to sign a franchise agreement to operate. Exactly what is in this document? Should you be worried about the fine print? Use this guide to learn how to start a franchise and navigate your business contracts easily.
What Is a Franchise Agreement?
A franchise agreement is a business contract that establishes the relationship between you (the franchisee) and the parent company (the franchisor).
The franchise agreement conveys a particular set of rights and responsibilities. Broadly speaking, a franchise agreement allows a franchisee to represent the franchisor’s intellectual property, business processes, and brand.
This franchising agreement also protects the franchisor’s intellectual property and ensures that franchise owners adhere to the company’s quality standards and operational requirements. Thus, the franchise agreement preserves the integrity of the franchisor and maintains consistency across all franchise locations.
What’s Included in a Franchise Agreement? The Parts and Pieces
As you learn how to start a franchise, you’ll want to pay attention to several key components of a franchise agreement prior to signing. These components include the following.
Disclosure
The Federal Trade Commission (FTC) requires franchises to disclose details about their operation prior to signing. This disclosure must include basic details about the company’s business model, financial history, and data on past litigation.
The FTC franchising rule requires franchisors to provide this document 14 days prior to signing the contract, which gives you time to review and consult an attorney.
Franchising Fee(s)
The franchise agreement gives you the right to use the franchisor’s business and brand to generate a profit. But this comes at a price. The franchising fee refers to an upfront cost that you’ll pay before launching your franchise.
The contract you sign will also specify whether there are any additional fees you’ll need to watch out for. These commonly include monthly royalties, marketing fees, and other costs that can surprise you if you don’t read carefully.
Duration of the Agreement
The contract you sign with the franchisor is not permanent. You’ll be bound to the franchise only for a predetermined duration, such as five years. The franchise agreement may or may not have options for renewal.
If you want to operate a franchise for the long term, you’ll want to check for term limits and renewal options. Otherwise, the franchisor is under no legal obligation to retain you after the expiration of your initial contract.
Operating Territory
The franchise agreement will specify your “territory,” which outlines the geographic area in which your franchise will operate. This can also include any local regulations that might impact your business, such as if you need a permit to operate within city limits.
The boundaries of this territory can overlap with other franchisees from the same company, but it’s important to know about any restrictions or guidelines about how to operate harmoniously in the same community as other franchisees. It is also important to note that some franchises benefit from overlapping territories by driving more business to each other- for instance, small coffee shops.
Training and Support
You don’t need to know how to start a franchise to be successful at it, as long as you have the support of your franchisor. The franchise agreement should include details about the kind of support you can expect from the franchising company. This can include:
- Training
- Access to equipment and supplies
- Point of Sale and Operating systems
- Guidance on business decisions
- Marketing tools and resources
The franchising agreement will also specify any costs associated with these items. For instance, many franchisors will expect franchisees to contribute to marketing costs, and in exchange, you’ll receive local promotional materials such as signs or coupons.
Having these stipulations in writing protects your rights as a franchisee and guarantees your access to the resources you’ll need to thrive in the industry.
Additional Terms and Conditions
Look over the franchise agreement carefully. You’ll want to understand all of the details, such as:
- Penalties for early termination
- Trademark policies for the company brand
- Obligations upon completion of the contract
Since you’ll have 14 days to review this document, you may want to consult a legal expert to help you parse the fine print and know exactly what you’re getting into.
Start Your Journey Today
If the idea of a franchise appeals to you, why not get started right now? At FranchiseOpportunities.com, you can use the online locator to find franchises in your area.
Research opportunities near you, and soon you may be setting off on an exciting new adventure as the owner of your own franchise.